The Coronavirus Aid, Relief, and Economic Security (CARES) Act was enacted on March 27, 2020, to help alleviate the financial impact of COVID-19 on individuals and businesses. Acknowledging that charitable organizations also play a vital role in providing assistance, the Act includes provisions that increase charitable deduction limitations in 2020. The goal is to encourage charitable giving that has an immediate impact.
Pre-CARES Act limitations
Prior to the CARES Act, the annual charitable deduction limitations ranged from 20 to 60% of a taxpayer’s adjusted gross income (AGI), depending on the assets donated and the charitable recipient. The limitation acts as a cap on the amount that can be deducted against income that year. Any charitable contribution in excess of that cap is not lost, rather it carries forward to subsequent years, subject to the same limitations that are then in effect (up to five years).
Before the CARES Act, individuals who itemized deductions were subject to the following limitations:
- Public charities (includes donor-advised funds)
- Cash: 60% of AGI
- Short-term capital gain property: 50% of AGI
- Long-term capital gain property (publicly traded): 30% of AGI
- Private nonoperating foundations (includes family foundations)
- Cash: 30% of AGI
- Short-term capital gain property: 30% of AGI
- Long-term capital gain property (publicly traded): 20% of AGI
CARES Act impact on charitable limitations
With respect to the charitable deduction limitations, the CARES Act raises the limitation for cash contributions to a public charity up to 100% of AGI for gifts given in 2020 only. Theoretically, this would allow individuals to reduce their 2020 taxable income to zero if cash gifts are large enough and are given to a public charity.
As mentioned, all other charitable deduction limitations weren’t impacted by the CARES Act. For instance, gifts of marketable securities are still limited to 20–50% of AGI, depending on the recipient and whether they’re short-term or long-term capital gain property. Another caveat is the treatment of contributions to a donor-advised fund (DAF). DAFs usually fall under public charity rules for contribution limitations. However, the CARES Act change doesn’t apply to DAFs, and therefore contributions are still limited to a maximum deduction of 60% of AGI. Like DAFs, contribution limitations for nonpublic charities and private nonoperating foundations also remain unchanged.
The CARES Act raises the limitation for cash contributions to a public charity up to 100% of AGI for gifts given in 2020 only.
Though most contribution limitations remain the same, with proper planning, individuals can benefit from the increase in the cash limitation. Taxpayers can still donate long-term capital gain property and contribute to a DAF or private foundation up to the Tax Cuts and Jobs Act of 2017 (TCJA) limitations. Taxpayer can then supplement such donations with cash contributions to public charities to receive a combined deduction of up to 100% of AGI. For example, with an AGI of $500,000 in 2020, taxpayers could gift appreciated marketable securities equal to 30% of AGI ($150,000) to a DAF and also give cash up to 70% ($350,000) of AGI to public charities. The gift of the appreciated marketable securities will still provide a full charitable deduction, and the taxpayers will not recognize any capital gain tax on the appreciated amount contributed.
Other notable changes
The CARES Act made two other notable changes. Individual taxpayers who claim the standard deduction can receive a $300 above-the-line deduction (this limit applies to the tax-filing unit so married taxpayers filing jointly are limited to a $300 deduction also) for cash contributions to public charities in 2020. In other words, the taxpayer gets the benefit of the deduction without needing to itemize. Prior to the CARES Act, there was no charitable deduction allowed for nonitemized taxpayers. The CARES Act also provides corporate taxpayers with a higher allowable deduction limit of up to 25% of taxable income for 2020 for cash contributions to public charities. This limitation is increased from a maximum of 10% taxable income in preceding years.
Elections and charitable carryforwards
In order to qualify for the increased charitable limitations in the CARES Act, individuals or corporate taxpayers must make elections on 2020 income tax returns. If an election is not made, the taxpayer will still be subject to current limitations under the TCJA.
The CARES Act also doesn’t impact the application of prior year carryforwards, which cannot be used toward the augmented 100% AGI limit. Also, any charitable contributions made in excess of AGI limitations in 2020 will be carried forward for five years, subject to the standard limitations.
Roth IRA conversions
For taxpayers who wish to make a charitable contribution in excess of their 2020 income, there’s an opportunity to accomplish two goals at the same time. Taxpayers can increase AGI by converting an IRA to a Roth IRA. Any such conversion is a taxable event, and taxpayers can use this to create additional AGI to absorb any excess charitable gift, instead of carrying it forward into subsequent years. In addition to capturing the additional deduction in the current year, the new Roth IRA gives taxpayers tax-free growth with no required minimum distribution (RMD), rather than the tax-deferred growth and RMDs in a traditional IRA.
For taxpayers who wish to make a charitable contribution in excess of their 2020 income, there’s an opportunity to accomplish two goals at the same time.
In summary, the CARES Act response to the COVID-19 pandemic has provided an opportunity for taxpayers who contribute in 2020 to receive a much larger charitable deduction than in prior years. Taxpayers should consult their tax advisor to determine the best strategy for their individual circumstances.
For further information or to discuss your charitable giving strategy, give us a call.